Already
beleaguered, gold suffered another sharp drop this week. When the
minutes from the Federal Reserveís latest policy meeting implied it
might slow its QE3 bond-buying campaign ďin coming monthsĒ, futures
speculators responded with heavy selling. But their extreme gold
bearishness is highly irrational, they are missing the forest for
the trees. Taper or not, quantitative easing remains super-bullish
for gold.

Quantitative
easing is the fancy name for the Fedís massive and unprecedented
bond-buying programs of recent years. In order for normal investors
to buy bonds, they first have to raise the necessary cash by selling
something else. But when central banks like the Fed buy bonds, they
conjure the cash out of thin air! The Fed pays the bond sellers
with new money that never existed before, which is then immediately
spent.

Thus throughout
world history the benign-sounding ďquantitative easingĒ was always
known by its far-more-sinister label of debt monetization.
Central banks literally convert their local governmentís debt into
new money, which is pure inflation. Governments ďfinanceĒ
their excessive spending by selling their bonds to their central
banks for newly-printed money, which the governments directly inject
into their economies.

This ultimately
results in relatively more money bidding for relatively less goods
and services, which inevitably bids up general price levels. There
is nothing more inflationary than central banks monetizing debt,
which is why it is so incredibly bullish for gold. Due to the
inherent limitations of gold mining, the global gold supply
perpetually grows vastly slower than the central banksí endless
supplies of fiat money.

The Federal
Reserve embarked on the slippery slope of debt monetization in late
2008. It had forced its benchmark interest rate to zero in response
to that yearís once-in-a-century stock panic. So without any more
conventional easing possible, it decided to print money to buy
debt for the first time in its history. And now today fully
5 years later, it has shown no signs of stopping despite endless
promises to the contrary.

And indeed the
money supply has soared since. Between mid-December 2008 when the
Fed launched its zero-interest-rate policy (ZIRP) to today, the M1
money supply is up 68%! Thatís why everything we all need to live
is much more expensive today than it was 5 years ago. There are far
more dollars chasing the goods and services our economy offers,
which have bid up their price levels significantly to greatly.

This includes the
gold price, the ultimate inflation barometer. In the week leading
into the Fedís decision to punish savers with ZIRP, gold was trading
near $800. Less than a few years later it challenged $1900, and
even today remains far higher than the pre-QE days. During the
first quantitative-easing campaignís lifespan gold surged 51%
higher, and in QE2 it rallied another 25%. Yet gold has withered
under QE3.

The Fed birthed
QE3, which is destined to be the Fedís largest debt monetization
ever, in September 2012. The day before gold was trading around
$1730. This week just 14 months later, it is down 28% over QE3ís
lifespan. Is goldís horrendous performance so far in QE3 because it
really isnít inflationary? No way. All the newly-created money the
Fed uses to monetize debt continues to balloon its balance sheet.

When the Fed buys
bonds, those bonds appear as assets on its balance sheet. The Fed
rather helpfully publishes extensive data on its holdings weekly,
which this first chart chronicles. Within the orange total balance
sheet, this data is stacked. The red Treasury holdings are on top
of the yellow mortgage bonds. The most striking thing in this chart
is the gargantuan growth in the Fedís balance sheet during QE3.

In September 2012
just before the Fed launched its unprecedented open-ended
third quantitative-easing campaign, its balance sheet was at
$2798b. This was already very high, as it had only averaged around
$875b in 2008 before the stock panic. But the Fed joined in
panicking, going nuclear with ZIRP and then QE in a matter of
months. And the Fedís massive debt-monetization campaigns have
rarely paused since.

After QE3 being
expanded to include Treasury monetizations last December, the Fed
has been buying up bonds with newly-created money at a blistering
$85b-per-month pace. This has catapulted the Fedís balance sheet to
$3822b as of this week, up a staggering $1024b or 37% over
QE3ís lifespan! Does it make any sense at all for gold to plunge
28% in just over a year where the Fedís balance sheet soared 37%?

Absolutely not!
The deluge of selling gold has suffered this year is
extraordinarily, epically irrational in light of what the Fed is
doing with QE3. Other than that emergency initial spike in late
2008, the Fedís balance sheet has never grown faster than it has
over this past year. All the new money it is creating to buy
bonds is exploding the money supplies, pure inflation. Goldís price
should be sharply higher over this span.

Yet just the
opposite has happened, gold has plunged as debt monetization
soared. One of the primary reasons is the way American futures
speculators are hysterically reacting to the Fed. Rather
than watch what it does, they are fixated on what it says.
And for the entire short history of QE3, the Fed has fallen all over
itself trying to convince the financial markets that QE3 will soon
end. Each time gold futures get dumped.

This whole
exercise has been a ludicrous farce right from the beginning. After
launching QE3 at its September 2012 meeting, the Fed more than
doubled its scale to include Treasuries just a few months later
in December. As always, that Federal Open Market Committee
meetingís minutes were released 3 weeks later in early January.
That was the first time gold got hit this year on the endless
QE3-taper talk.

At the very
meeting where QE3 was expanded with a nearly-unanimous 11-to-1 vote,
there was already internal discussion on when to end QE3! So
futures speculators heavily sold gold contracts, rightfully figuring
that lower future inflation was less bullish for gold. But ever
since 2013ís initial release of FOMC minutes, the idea that the Fed
is debating when to slow and eventually end QE3 has been old news.

The Fedís FOMC
meets 8 times annually, so there are 8 FOMC statements released per
year each followed several weeks later by the meetingsí minutes.
This works out to some major Fed release about once every 3 weeks.
And at every subsequent meeting after QE3 was expanded to
include Treasuries, the FOMC members continued to debate how and
when to exit QE3. It was never going to be permanent.

Yet American
futures speculators continued to dump gold aggressively each time
the Fed rehashed this old news that QE3 would eventually end. A
couple months ago I superimposed FOMC decision and minutes dates
over a gold chart,
and the result is striking. Nearly all goldís sharp and anomalous
selloffs this year are the direct result of futures traders reacting
to what the Fed is saying. They keep freaking out!

This response is
absurdly irrational. Since early January it has been
crystal-clear that QE3 wouldnít last forever, yet each time the Fed
repeats that heavy gold selling follows. This weekís is the latest
example. Yet despite Fed officialsí constant jawboning that they
have to slow and stop QE3 soon, it just keeps on chugging ahead at
full steam. The Fedís balance sheet continues to balloon as it
aggressively inflates.

A common proverb
we all learn at a relatively young age is ďtalk is cheapĒ. People
promise to do things all the time, from our friends to politicians
to Fed officials. Yet if they donít carry through on those
promises, we quickly discount their credibility. Thus the older and
wiser we get, the more we tend to focus on what people do
instead of what they say. Fed officials have been promising QE
ending soon since early 2009!

By irrationally
fixating on the endless Fedspeak that never comes to fruition,
futures speculators are missing the forest for the trees. Since
early January, despite every FOMC meeting and minutes since, despite
the long parade of Fed officials suggesting otherwise, the Fedís
balance sheet has continued to grow at a frightful pace as it
continues to monetize debt. Itís high time futures traders start
paying attention.

QE1 was gigantic,
totaling $1750b of Fed bond buying with newly-conjured money. Yet
only $300b of that included direct Treasury monetizations, the
purest form of inflation. Thanks to Obamaís insane
record deficit
spending and debt growth, every dollar the Fed has created to
buy Treasuries has been immediately spent by Washington. All this
money injected directly into the US economy is bidding up price
levels.

Gold powered 51%
higher during QE1, a universal acknowledgement by all market
participants including futures speculators that QE is highly
inflationary. QE2 was much smaller than QE1, totaling $900b of debt
monetizations. But while all of this was in US Treasuries, only
$600b was inflationary new buying. Yet this was still twice the
size of QE1ís total Treasury monetizations, so gold still powered
another 25% higher.

Despite an
entire year of Fed officials falsely promising that QE3 would
end soon, it has become utterly massive. As of the end of this
month, the Fed will have monetized $560b of mortgage-backed bonds
and $495b of Treasuries! This means QE3 is already $1055b,
dwarfing QE2 and giving QE1 a run for its money. Its $495b of
direct Treasury buying is way higher than QE1ís $300b and rapidly
approaching QE2ís $600b.

And no matter
what the Fed does, QE3 is going to get a lot bigger still! All
the Fed officialsí bloviating all year long has made one thing very
clear, the FOMC is terrified slowing QE3 will have an adverse market
impact. I discussed
the risks of
this in depth back in September just before the Fed was universally
expected to start tapering QE3. Of course the Fed chickened out and
failed to keep its implied promises, again.

But back in
mid-June, the Fed chairman laid out a best-case QE3-tapering
timeline. One thing the Fed has emphasized over and over again is
the end of QE3 will be gradual to minimize the risk of
spooking the markets. Ben Bernankeís plan called for QE3ís new bond
purchases gradually being reduced to zero over a 9-month span. I
strongly suspect no matter when QE3 tapering starts, it will take
about 9 months.

Assuming an even
taper pace, those 9 months will each average half of QE3ís current
$85b per month of buying, or $42.5b. Thatís another $383b or so
baked in on top of QE3ís already-gigantic $1055b size. This puts
QE3 up to $1438b, starting to challenge QE1. And every month that
the start of QE3 tapering is delayed increases its total size by
$85b. Even a December-meeting taper would leave QE3 at $1523b!

The more-likely
March meeting, the first under the new Fed chairman, would mushroom
QE3 to $1778b. This exceeds QE1 absolutely, and the Treasury
portion of QE3 alone would be $878b. This is almost as big as the
new Treasury monetizations in QE1 and QE2 combined! And many
analysts believe Janet Yellen, who is far more Keynesian and dovish
than Ben Bernanke, will keep buying bonds much longer.

No matter when the
Fed starts tapering QE3, this debt-monetization campaign is going to
be massive beyond belief. And even after QE3 eventually ends, it is
not like the Fed is going to instantly sell its trillions of
dollars of bonds. To do so would crash the Treasury market and
send yields and general interest rates skyrocketing. Instead the
Fed will simply let all the bonds it bought naturally mature and
gradually roll off.

This is going to
take many years. Way back in QE1, the Fed purchased $200b in agency
debt (Fannie and Freddie bonds). It hasnít purchased any more
since. Yet look how slowly this green category is naturally rolling
off the Fedís balance sheet. The Treasuries are going to take
considerably longer, as they have longer maturities since the Fed is
by its own admission explicitly manipulating long rates.

The chart above
shows how slowly Treasuries rolled off in the lulls between QE1 and
QE2, and then QE2 and QE3. The point is even when QE3 eventually
ends, the Fedís balance sheet is going to remain extremely high
for many years to come. All of this monetary inflation will
remain in the economy in the meantime, continuing to keep price
levels high. The trillions of QE will take years to unwind after
QE3 ends.

So the goofy
futures speculators dumping gold every time the Fed or some Fed
official implies the FOMC might start slowing QE3 soon is the height
of irrationality. QE3 is massive beyond belief, and still growing
full-speed. QE3 will keep expanding the Fedís balance sheet even as
it is tapered, and all this inflation will remain baked into the
economy for many years to come until all the bought bonds slowly
mature.

There is a strong
case to be made that gold prices already fully adjusted to
reflect a QE3 tapering back in early January, when they were still
trading around $1650. All the futures selling since has been the
result of emotion, totally hysteric. And the resulting
gold-price anomaly
grows even more extreme with each passing month as the Fed keeps QE3
fully online, ensuring its ultimate size will be that much larger.

QE3 is almost
certainly going to prove the biggest inflationary event in the Fedís
century-long history, wildly bullish for gold. One of the surest
bets anyone can make is that gold prices will be much higher when
QE3 ends than they were when it began. And since that benchmark is
way up around $1730, gold is going to have to regain much ground.
Futures speculators
buying again
will drive this uplegís early gains.

While weíre on
this Fed thread, thereís something even more important than QE for
goldís future, ZIRP. The Fed has been holding interest rates at
zero since late 2008, and Fed officials are now saying ZIRP may stay
in place well into 2017, long after QE presumably ends.
Keeping short rates so artificially low guarantees negative real
interest rates, the most bullish monetary environment possible
for gold.

Iíve written many
essays on negative real rates and gold, the latest
exactly a year
ago. ZIRP bludgeons down short Treasury yields, including the
benchmark 1-year Treasury Bill yield used in the real-rate
calculation. From it the year-over-year change in the
chronically-understated US Consumer Price Index is subtracted,
revealing real rates. They are going to remain negative for as long
as the Fed maintains ZIRP.

Goldís current
secular bull was born in early 2001 because real interest rates were
heading into negative territory due to Fed interest-rate
manipulations. Negative real rates guarantee that bond investors
will lose purchasing power after inflation, making gold far more
attractive. Thus gold tends to power higher as long as real rates
remain negative. Secular gold bulls donít end until real rates
spike massively positive.

It took real rates
above 6% to kill the 1970s secular gold bull. And even with
the absurdly-low and totally fictional 1.0% inflation rate the CPI
is claiming today, the Fed would have to hike short rates near 7% to
see similar real rates again. I canít imagine that happening in the
next decade, let alone the coming years! This gives goldís current
secular bull years left to run before the Fed starts thinking about
ending ZIRP.

And at best in
todayís secular bull, gold was merely up 7.4x by mid-2011. That
compares to a whopping 24.3x in the 1970s secular bull! We have yet
to see the gold popular mania that is necessary to kill a secular
bull, and the Fedís massively-inflationary easy-money policies will
certainly contribute to its eventual arrival. ZIRP is at least as
bullish for gold as QE, and history argues it may be even more so.

So donít worry
about the myopic American futures speculators freaking out every
time the Fed says it ought to slow and end QE3 soon. Futuresí
extreme leverage forces these guys to have trading time horizons
measured in days or weeks, they canít see the forest for the trees.
But eventually they will figure out that they should watch what the
Fed is doing rather than merely saying, and they will flood back
into gold.

Weíll be ready at
Zeal. This year has been the most brutal imaginable for the entire
precious-metals realm, painfully testing the mettle of all
contrarian investors and speculators. Most have given up and
capitulated, leaving gold, silver, and especially their
minersí stocks
absurdly cheap. No one is left but the bears, who have foolishly
convinced themselves gold is going to spiral lower forever despite
enormous QE.

But this is the
time to buy low, with the streets drenched in blood. We publish
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before everyone else figures out how cheap gold is!

The bottom line is
goldís recurring selloffs this year each time the Fed announces QE3
isnít going to run forever are the height of hysteria. This is old
news, and the gold price had already adjusted to that reality way
back in early January. All the selling since was emotional, driven
by unsustainable hyper-bearishness. Sooner or later excitable
American futures speculators will start watching what the Fed
does.

They will realize
QE3 is massive beyond belief, with enormous direct Treasury
monetizations. They will grasp that the tapering process will take
many months to unfold once started, during which the Fedís balance
sheet will continue growing. And they will understand that it will
take many years for QE to gradually unwind through maturing bonds.
Then they will return to gold with a fervor few can imagine.